Market to weaken – but don’t expect Armageddon

Liam Bailey, head of residential research said: "The excitement caused by rising prices in recent months has hidden the fundamentals that have contributed to this performance – particularly the degree to which the affluent and equity rich have led the market.

"There are good reasons why we ought to expect a slow down in price growth, with prices even falling in 2010. However we believe that this reversal will follow a more benign scenario, rather than a more cataclysmic alternative.

"A weak economy will feed through to lower household wealth and both the ability and willingness to bid up house prices. Continuing growth in unemployment, allied to wage freezes and tax rises, and a rise in average mortgage rates will force a number of sales which, in the absence of greater depth of demand, will see prices slipping back.

"However we believe that price falls will be capped at around 3% in 2010. It would be wrong to expect a continuation of the current rapid recovery in the housing market, the economy is not in a position to permit this in the short-term. Similarly, it would be wrong to expect carnage.

"Real demand is strong, supply in the wider market and the new-build sector is very low and we are unlikely to see a rapid shift away from a low interest rate environment."
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